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Freshfields Risk & Compliance

| 3 minutes read

Coronavirus and energy supply in times of crisis

German gross domestic product will fall by five per cent due to coronavirus, German economic research institute the Institut der deutschen Wirtschaft has predicted, and by up to ten per cent if restrictions remain in place for longer. The drop in the GDP from the 2008-9 financial crisis was 5.7 per cent.

The energy sector is grappling with the effects of COVID-19. All levels of the value chain are affected. 

Energy production

The partial shutdown has resulted in a significant drop in electricity consumption. Compared to the beginning of March, demand has fallen by 9 per cent in the space of one month. This means, in turn, that the market-clearing price of power plants is set with lower marginal costs. Primarily coal-fired power plants will come under increasing market pressure.

This shift means a lower electricity price, with an increase in the percentage of renewable energy. However, power plant operators are losing important income needed to cover total costs. In addition, prices for CO2 certificates have fallen, which, in turn, could drive an increase in harmful greenhouse gas emissions.

Falling wholesale prices for electricity come with a simultaneous increase in income risks to renewable energy plant operators because the market premium is dropping. This premium is linked to the average monthly stock price, and the risk of negative prices is growing. The economic risk associated with direct sellers is also rising. The wide-scale halt in air traffic means a lack of weather data, which is normally collected by aircraft.

Finally, power plant operators could be forced to reschedule maintenance and refurbishment. For instance, on 3 April 2020 the Lower Saxony State Government decided to halt the planned refurbishment of the Grohnde nuclear power plant scheduled to take place this month. Instead of shutting down the plant for 19 days, maintenance work will now be spread across approximately six weeks. Similar restrictions are expected for other power plants. In addition to production outages, measures of this kind result in restrictions being placed on grid-support system services, such as reactive power compensation.

Energy distribution

Energy distribution companies that mainly supply households and other small customers are facing cash-flow problems and higher distribution costs. This is due to the COVID-19 Act, which gives consumers and ‘micro-businesses’ (ie businesses with fewer than 10 employees and an annual turnover or annual balance sheet of up to €2m) that cannot meet payment obligations as a result of coronavirus a fixed-term right to refuse performance between 1 April 2020 and 30 June 2020.

The right to refuse performance means that debts caused by coronavirus cannot be taken into account when determining total outstanding payments, so energy supplies cannot be cut off. After the moratorium period expires, strictly speaking the deferred debts must be paid off normally. But in practice payment plans will presumably be agreed that take account of a customer’s individual situation. Distribution-related expenses will increase significantly.

For distributors supplying larger customers, coronavirus-related risks primarily result from the higher risk of customer insolvency. This raises questions of innovative pricing models, improved hedging of the customer insolvency risk, the reliability of take-or-pay clauses and adjustment options in general. The latter is particularly relevant for energy supply agreements where current performance falls well below expected performance.

Grid operation

As critical infrastructure, the operation of energy supply grids is secured. Measures where direct contact with customers is unavoidable, for instance in connection with the transition from L- to H-gas or meter replacements, are only being implemented over a prolonged period.

The Federal Network Agency also provides extensive relief from a procedural law perspective in relation to the corona-related impact on business processes. Along with these direct effects, grid operators will also have to reckon the indirect impact of claims to adjustments coming from customers.

COVID-19 energy industry opportunities

However, with these risks come opportunities. Times of crisis see calls for stimulus packages and investment programmes. The most recent was communicated by the Agora Energiewende thinktank entitled “The double booster - proposal for a targeted 100 billion programme for growth and investment” (“Der Doppelte Booster – Vorschlag für ein zielgerichtetes 100-Milliarden-Wachstums- und Investitionsprogramm”).


covid-19, europe, energy and natural resources